Admiralty Law and Practice – A Practical Guide to Ship Arrest

(I would like to thank Ms. Lai Wern Ching for kindly allowing me to use the relevant slides she prepared for an ADC in-house seminar).

  1. Introduction

As mentioned in my previous article[1], the cornerstone of Admiralty Law is the action in rem which gives the right to arrest the res [2] involved before judgement. Compared to the civil jurisdiction of the Court, the right to arrest is, arguably, as of right, provided of course, the pre-requisites before instituting an action in rem are met. Though the right to arrest a defendant and the right to attach his property before judgement is also available under non-admiralty civil jurisdiction[3], that right is illusive, as the Plaintiff has to prove a plethora of things before the court would grant an order to attach[4].

The Plaintiff may also apply for a “Mareva”[5]injunction under the Court’s civil jurisdiction. Just like attachment before judgement, the “Mareva” is not available as of right and the requirements to be met before the applicant is successful are fraught with difficulties. The injunction may also not be absolute in that it may not cover all the assets of the defendant.

  1. Scope of this article

In this article, I intend to highlight the practical issues which the intending arresting party should take into consideration before launching an action in rem. With stronger reasons, it may be that, the arresting party’s rights to an in rem action would have already been lost before the writ in rem is issued. If he therefore files an action in rem in ignorance of his rights and executes the warrant of arrest, he may unwittingly be exposed to damages for wrongful arrest or “frivolous” arrest.

  1. When does the right to file an action in rem arise and hence the right to arrest?

In my previous article[6], I had alluded to the occasions when admiralty jurisdiction of the court could be invoked, namely, the 18 matters set out in sub- sections 20 (2) (a) to (s) of the United Kingdom Supreme Court Act 1981 (UKSCA) and those in the Practice Direction No.1 of 2012. Except for sub-section 20 (2) (d), where only an action in personam is available, the right to institute an action action in rem may be brought under the other sub-sections. The right to institute an action in rem is set out in Sections 21 (2) to (4) of the UKSCA while Section 21 (1) of the UKSCA provides that an action in personam may be brought in the High Court in all cases within the admiralty jurisdiction of that court.[7]

Sections 21 (2) to (4) of the UKSCA in essence provide that –

In the case of any such claim as is mentioned in Sections 20 (2) (a), (c) or (s) or any such question as is mentioned in Section 20 (2)(b), an action in rem is available against the ship or property in connection with which the claim or question arises.[8]

In any case in which there is a maritime lien[9] or other charge on any ship, aircraft or other property for the amount claimed, an action in rem may be brought against that ship, aircraft or property.[10]

In the case of Section 20 (2) (e) to (r)[11], where:-

(a) the claim arises in connection with a ship; and

(b) the person who would be liable on the claim in an action in personam (‘the relevant person’) was, when the cause of action arose, the owner or charterer of, or in possession or in control of, the ship,

an action in rem may (whether or not the claim gives rise to a maritime lien on that ship) be brought against:-

(i) that ship, if at the time when the action is brought the relevant person is either the beneficial owner of that ship as respects all shares in it or the charterer of it under a charter by demise; or

(ii) any other ship of which, at the time when the action is brought, the relevant person is the beneficial owner as respects all the shares in it.[12]

Sub-sections 20 (2) (a) to (s) and the matters set out in the Practice Direction are found at Annexure A and Annexure B respectively.

The Practice Direction however does not stipulate which of the matters set out gives rise to the right to file an action in rem. If an action in rem is filed where no such right exists, there could be a risk that the Plaintiff be liable to damages for wrongful arrest. There is fortunately an apparent overlap of the matters in the Practice Direction and sub-sections 20 (2) (a) to (s) of the UKSCA. I am of the view that in situations where the claim cannot be pigeon-holed in any of the matters where a right to an action in rem exists, a suitably drafted application for a warrant of arrest may overcome the problem. For example, the application could be drafted such that the matter in the Practice Direction be read together with one of the matters in the UKSCA where the right to an in rem action exists.

I now turn to other considerations which the arresting party should take into account before filing an action in rem or executing an arrest.

  1. Immunity of government ships

Section 37 (1) of the Government Proceedings Act provides that –

“Nothing in this Act shall authorise proceedings in rem in respect of any claim against the Government or the arrest, detention or sale of any ship or aircraft, or of any cargo or other property belonging to the Government,  or give to any person any lien on such ship, aircraft, cargo or other property.”

The statutory immunity extends to ships beneficially owned by the government and those demise-chartered to them.

  1. Foreign sovereign immunity

This immunity is qualified. If the act upon which the claim arose is of a commercial as opposed to governmental nature, an action in rem can be brought against the foreign sovereign.[13] Malaysia adopted this restrictive immunity doctrine in the then Supreme Court case of Commonwealth of Australia v Midford (Malaysia) Sdn Bhd & Anor.[14]

  1. Insolvency and winding-up proceedings

6.1      Compulsory winding-up

An action in rem may still be brought during circumstances when the owner is insolvent. However, the action in rem would be subject to the Companies Act 2016 (CA 2016).  Firstly, the issue is whether the action in rem could be filed at all and if already filed, whether it could be proceeded with.

Section 472 (3) CA 2016 reads –

“Any attachment, sequestration, distress or execution put in force against the estate of the company after the presentation of the winding up petition shall be void.”

“Sequestration” has been construed to include the arrest of a ship.[15] Further, the arrest of a ship and subsequent sale are equivalent to “sequestration” and “execution” respectively.[16] The above section has to be read with 2 other provisions in the CA 2016 which gives the court discretion to allow the action in rem to continue and to validate the arrest and the subsequent sale namely-

Section 470 (1) CA 2016 reads –

“At any time after the presentation of a winding up petition and before a winding order has been made, the company or any creditor or contributory may, where any action or proceeding against the company is pending, apply to the Court for an order to stay or restrain further proceedings in the action or proceeding, and the Court may stay or restrain the action or proceeding accordingly on such terms as it thinks fit.”

Section 471 (1) CA 2016 reads –

“When a winding up order has been made or an interim liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the company except by leave of the Court and in accordance with such term terms as the Court imposes. “

An arrest of a ship after the commencement of winding-up would be void in accordance with Section 472 (3) CA 2016.  Sections 470 (1) and 471 (1) CA 2016 confers upon the court discretion to validate the arrest. Whether or not the court will exercise the discretion in favour of the arresting party would depend on when the writ in rem was issued. Leave to proceed would usually be granted to a secured creditor as he could enforce his security independent of the liquidation process.[17] A maritime claimant who has issued a writ in rem before commencement of winding-up is a secured creditor.[18] Such a maritime claimant has a statutory right of action in rem or a statutory lien.[19] On the other hand, a holder of a maritime lien becomes a secured creditor when the cause of action accrues so long as the maritime lien accrues before the commencement of the winding-up.[20] However, by virtue of Section 472 (1) CA 2016, execution process must be completed before the commencement of winding-up for otherwise the maritime claimant has no right to retain the proceeds of sale as against the liquidator. The court has however discretion to set aside the liquidator’s rights in favour of the creditor.

6.2      Voluntary winding-up

The winding-up is deemed to begin at the time when the resolution to wind up the company is passed.

Section 441 (1) CA 2016 provides that:

“A voluntary winding up shall commence –

(a) where an interim liquidator has been appointed before the resolution for voluntary winding up is passed, at the time when the declaration referred to in section 440 is lodged with the Registrar; and

(b) in any other case, at the time of the passing of the resolution for voluntary winding up.”

Section 451 (1) CA 2016 provides that:

“Any attachment, sequestration, distress or execution put in force against the estate or effects of the company after the commencement of a creditors’ voluntary winding up shall be void.”

Section 451 (2) CA 2016 further provides that:

“After the commencement of the winding up, no action or proceeding shall be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the court may impose.”

The above principles in relation to Compulsory Winding-up would apply equally to a Voluntary Winding-up situation with the exception that the principles would be modified in view of the difference in time at which the winding-up commenced.

  1. Change of Ownership

If a change of ownership occurs before a writ in rem is filed, the right in rem is lost. It is therefore imperative to ascertain the identity of the owner who should be the person who would have been liable in an action in personam. It is advisable to issue the writ in rem as soon as the cause of action arises.[21] However, in the case where the claim attracts a maritime lien, the right survives a change of ownership. Unless the arresting party’s claim attracts a maritime lien, he will be wrongfully arresting a ship if he persists with it when the ownership has already changed.

  1. Service of the Writ in Rem

Service of the writ must be on the ship to be arrested.[22] Service can only be done when the ship is within the jurisdiction.[23] Substituted service is not allowed.[24] Sometimes service may be deemed when a solicitor indorses acceptance on the writ on behalf of the owner.[25] The owner may also enter appearance voluntarily before service is affected although such deemed service does not have the effect of invoking admiralty jurisdiction.[26] The issue of the invocation of admiralty jurisdiction is related to the “one claim, one ship” principle. As mentioned earlier, an action in rem is also available against “sister ships” for claims arising under Section 20 (e) to (r) of the UKSCA 1981.  The writ may name the offending ship together with the sister ships as Defendants. Once the writ or the warrant of arrest, whichever is earlier, is served on one of the ships, the other ships must be struck out from the action pursuant to the “one claim, one ship” principle.[27] If admiralty jurisdiction was invoked by deemed service of the writ, Defendants could manipulate the situation by preventing their most valuable ships from sailing into the jurisdictional waters of the Plaintiff when the legislation was intended to give the Plaintiff the advantage of the choice of ship to be arrested.[28] Service on the master is defective service.[29] However, this is a mere irregularity which would be waived if the owner takes a step in the proceedings.

  1. Caveat against arrest

It is imperative that the intending arresting party search the Caveat Book kept at the registry at the High Court before carrying out an arrest. Though the existence of a caveat does not prevent an arrest,[30] the arresting party will have to show good and sufficient reasons why he persisted with the arrest for otherwise the arresting party would be subject to a claim for damages by the caveating party for losses as a result of the arrest.[31] Further, the caveating party need not have to show malice or gross negligence as in an action for wrongful arrest.[32] This is justified as the caveating party would have provided an undertaking to enter appearance and furnish bail up to and pay into court a specified amount in order to prevent an arrest when lodging the caveat.[33]

  1. Mortgagees

A mortgagor/owner has the absolute right to deal with his ship for so long as he does not do anything to impair the value of the mortgagee’s security. If he enters into a contract with a third party, he can perform the contract under such circumstances. The mortgagee/arresting party runs the risk of committing the tort of interfering with contractual rights when the mortgagor/owner has let out on charter the ship in question under the circumstances aforesaid.[34] If the mortgagee nevertheless goes ahead to arrest the ship when he has no right to do so, the charterer can obtain an order for the release of the ship and claim damages for such interference.

  1. Wrongful Arrest/Frivolous arrest

An owner has to establish malice or gross negligence on the part of the arresting party to succeed in an action for wrongful arrest.[35] This is equivalent to malicious prosecution in a civil action which is not easy to establish. On the other hand, if a plaintiff could have easily settled a claim with a letter of demand but yet went on to arrest the ship, the court will make an order of costs against him which would include the costs of arrest. With stronger reasons, if the Plaintiff persists on the arrest despite the existence of a caveat against arrest, he would be liable to damages if he cannot show good and sufficient reasons to do so.[36] There is no requirement to show malice or gross negligence in such cases.

  1. Security for Release /Amount of security

The usual forms of security are bail, letters of undertaking from a protection and indemnity (P&I) club and bank guarantees. Another form of security is payment into court but it is rarely used.[37] In practice, the parties negotiate the form of security to be provided. The court will normally be reluctant to disturb the agreement. In the absence of such agreement, the deciding factor as to what security to opt for is the reliability of the security. For instance, if it was a letter of undertaking from a P&I club, the club should have some reputation internationally and known to meet its undertakings or has assets within the jurisdiction. A bail bond is a security given to court. Bail bonds are normally preferred over the other securities as a Plaintiff with a judgment need not bring a separate action against the other sureties. He can levy execution on the bond.  The Plaintiff should ensure that the surety is good for his money. If he does not feel confident of the surety’s financial capacity, he can apply to the court accordingly and cross-exam the surety on his affidavit with regards his financial means but any unfounded application may result in an order of costs been awarded against him.[38] The Plaintiff should ask for an amount of security equivalent to his claim together with interest and costs based on his reasonably best arguable case.[39] If the Plaintiff’s demand is exorbitant or seen to be oppressive, the defendant may apply to vary or set aside the security, in which case the Plaintiff may be liable for costs of such an application apart from having the security moderated.[40]

  1. Time Bars

This is always something to be considered before filing any action. This is particularly important for cargo claims where the limitation period is only 1 year under the Hague or the Hague-Visby Rules.[41]

  1. Maritime Liens

This is a peculiar lien. Its historical origins are unclear. Its legal characteristics are not found in common law or equity.[42] Nevertheless, “its juridical nature is fairly well settled. In essence, it is an encumbrance or charge over a ship or other res like cargo or freight, which accrues from the moment the underlying claim giving rise to it attaches, travels secretively with the res, survives any change of ownership of the res (except one brought about by judicial sale).”[43]  A maritime lienee has the right to file an action in rem to enforce his claim.[44] The maritime lien enjoys high priority when proceeds of sale are been paid. The arresting party would normally be ignorant of the existence of a maritime lien as there is no such thing as a registry for such liens unlike mortgages. The claims that give rise to maritime liens are salvage, damage done by a ship, seaman’s and master’s wages, bottomry and master’s disbursements.[45] Master’s wage and disbursements are statutory whereas the other claims had been developed by the English admiralty courts. Bottomry liens has had their scope extended by legislation. The range of maritime liens may be different in other jurisdictions. The lex fori is applied when determining which claims attract maritime liens.[46] The categories of maritime liens can only be expanded legislatively.[47] The courts have been reluctant to expand the scope of claims that attract maritime liens for the obvious reason that maritime liens do not sit very well commercially because of their peculiar legal characteristics, which is generally atypical of Malaysian jurisprudence.

  1. Timing

It is prudent to always keep in touch with the authorities on the movement of the ship. The internet now has applications to locate the ship. However, the relevant ship may not be able to be located as they would turn off their transponder especially when it knows it is been hunted down. This may be in breach of their insurance contract though. Unnecessary costs would be averted for an aborted arrest if the arresting party has knowledge of the schedule of the ship. Time is precious to owners/charterers. The ship is in port one minute and after discharging its cargo, the ship is underway again to discharge cargo or pick up cargo in another port.

  1. Conclusion

This article may not have covered all the considerations. Depending on the circumstances, other practical considerations like costs, priority of claims, the existence of a good defence and the issue of forums non convenience may have to be taken into account before starting an action in rem.

________________________________________________________________________________

By Lt. (Rtd) Paul K.W Kwong (Royal Malaysian Navy) (view profile)
Partner , Azman Davidson & Co (Family Law, Insolvency, Litigation, Shipping)
+603 2164 0200 (ext no. 114)
paul.kwong@azmandavidson.com.my

 

[1] Introduction to Admiralty Law in Malaysia.

[2] The “res” or “the thing” could be the ship or the ship’s cargo or freight. Almost always the ship is “the res” as it is obviously more valuable and tactically more practical provided the right to arrest is available to the Plaintiff.

[3] Sections 15 and 19 of the Debtors Act 1957.

[4] Sections 15 and 19 of the Debtors Act 1957, supra.

[5] Mareva Compania Naviera SA v International Bulkcarriers SA [1980] 1 All ER 213.

[6] Introduction to Admiralty Law in Malaysia, supra

[7] Subject to Section 22 of the UKSCA.

[8] Section 21 (2) of the UKSCA.

[9] The maritime lien will be discussed in a latter article.

[10] Section 21(3) of the UKSCA.

[11] Section 21 (4) of the UKSCA.

[12] This is known as “sister ship” arrest.

[13] The Philippine Admiral [1977] AC 373

[14] [1990] 1 MLJ 475; See also Bank Bumiputra Malaysia Bhd v International Tin Council [1987] 2 MLJ 732.

[15] Per Jessel MR in Re Australian Direct Steam Navigation Company

[16] Per Hewson J in The Constellation [1966] 1 WLR 272.

[17] Re David Lloyd & C0 (1877) 6 Ch D 339.

[18] Re Aro Co Ltd [1980] 1 Ch 196, CA.

[19] Re Aro Co Ltd, supra.

[20] In re Rio Grande Do Sul Steamship Co (1877) 5 Ch D 282; Re Aro, supra.

[21] The Monica S [1968] P 741; see also, The Loon Chong [1982] 1 MLJ 212.

[22] O.70 r 7(1) Rules of Court 2012 (ROC 2012).

[23] The Talabot [1975] 132 CLR 449; The Espanoleto [1920] P 223; The Freccia del Nord [1989] 1 Lloyd’s Rep 236; O.70 r3(3) ROC 2012.

[24] The Good Herald [1987] 1 Lloyd’s Rep 236.

[25] O.70 r(7)(2) read with O.10 r 1(3) ROC 2012.

[26]The Fierbinti [1994] 3 SLR 864.

[27] Section 21 (8) UKSCA 1981.

[28] The Fierbinti [1994] 3 SLR 864.

[29] The Prins Bernhard [1964] P 117; The Marie Constance (1877) 3 Asp MLC 505.

[30] O.70 r 5(2) ROC 2012.

[31] O.70 r 6 ROC 2012.

[32] Toh Kian Sing, Admiralty Law and Practice.

[33] O.70 r 5(2) ROC 2012.

[34] The Myrto [1977] 2 Lloyd’s Rep 243.

[35] The Evangelismos (1858) 12 Moo PC 352; The Maule [1995] 2 HKC 769; The Kommunsar (No.3) [1997] 1 Lloyd’s Rep 22 where the element of objectivity was introduced.

[36] O.70 r 6 ROC 2012.

[37] O.70 r23 ROC 2012.

[38] The Piya Bhum [1994] 1 SLR 564.

[39] The Moschanthy [1971] 1 Lloyd’s Rep 37; The Suhaili 520 [1988] 1 MLJ 210; The mv Ira [1996] 2 MLJ 109.

[40] The Irish Fir (1943)  Ll  LR 51; The George Gordon (1884) 1 PD 46.

[41] These are rules which govern the carriage of goods by sea; also see the Carriage of Goods by Sea Act 1950.

[42] Toh Kian Sing, supra.

[43] Toh Kian Sing, supra.

[44] Section 20 (2) UKSCA 1981, supra.

[45] The Bold Buccleugh (1851) 7 Moo PC 267.

[46]The Halcyon Isle [1981] AC 221.

[47] The Acrux [1965] P 391; The Halcyon Isle, supra; Contra Textainer Equipment Management v Baltic Shipping Company [1995] AMC 839.

Featured photo by Hanson Lu on Unsplash

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